Honest Holidays

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Retail Merchandiser, November/December 2011

To avoid crowded parking lots, frantic showrooms and lingering lines, many shoppers this holiday season will once again head online, embracing the holiday e-commerce experience of special sales, coupons, shipping offers, and other benefits. However, with the surge of online traffic and increased transaction volumes, e-commerce merchants and their customers face a greater risk of falling prey to fraudulent behavior.

During the holidays, some merchants become overwhelmed by the crush of holiday orders and process them without appropriate fraud reviews. For instance, they might loosen their policies and ship merchandise to names and addresses that don’t match those of credit cardholders, opening the door to more fraud. In contrast, other merchants clamp down by rejecting any risky-looking orders and wind up turning away legitimate sales. All the while, opportunistic fraudsters are developing sophisticated tactics that can cut into a merchant’s holiday sales, bruise their brand and negatively impact a genuine customer’s experience.

Industry reports estimate that U.S. merchants lost more than $30 million to fraud during last year’s holiday season, and these losses have been rising every year. The most common risks are associated with identity theft, credit card and gift card payments, employee theft and merchandise returns. While many retailers have put safeguards in place and have become adept at protecting themselves from the more mainstream payment schemes, many fraudsters have adapted their techniques and continue to successfully scam the system.

Perhaps one of the biggest threats retailers will face in the 2011 holiday season is that of “friendly fraud,” which is when an individual fraudulently claims they never received a product after they were charged for it. After the fraudster disputes the payment with their bank and subsequently receives a reimbursement, the merchant is left to pay. Described as “friendly” because consumers did not have their identity or credit card stolen, this type of fraud is expected to only increase. Many merchants don’t find out the extent of the damage done by fraudsters until 30 to 45 days later, when they receive their statements from card issuers notifying them of chargebacks. Although this is one of the most difficult types of fraud to detect, retailers can work with a fraud prevention provider to identify known friendly fraud perpetrators and thereby limit their vulnerability to this type of fraud.

In recent years, virtual gift cards have become an increasingly popular gift. Taking advantage of the increased volume of purchases during the holiday months, fraudsters use stolen credit card numbers to purchase online gift cards. Since nothing is sent to a physical address, these purchases often fly under the radar. Today’s advanced fraud detection tools enable companies to authenticate email addresses to credit cards.

In addition, it is not uncommon for merchants to offer online specials or electronic coupons during the holiday season. Unfortunately, these programs are generally run by third-party vendors and lack the retailer’s fraud prevention tactics. As fraudsters are quick to smell blood in the water, they are manipulating these systems by subscribing under multiple user names, for instance, to get numerous discounts or free products. Although this does not have the same severe financial or reputational impact as chargebacks, this mischievous behavior can quickly add up and take a cut out of revenue.

Similarly, highly coveted loyalty or points programs are also falling victim to cyber criminals. Customers who regularly earn points by being loyal to a brand could be at great risk of manipulation or theft, as criminals hack into third-party accounts to redeem and spend members’ points.

The irony is that rewards programs and coupons—arguably trademarks of good customer service—could end up being a vulnerability for a retailer’s brand, and more importantly, the customer. It is critically important for third-party providers that typically manage these programs to significantly improve their fraud prevention programs.

Much like the hiring of temporary workers to staff brick-and-mortar stores, retailers should consider adding supplemental fraud protection services in time for the holidays to help them reduce fraud and maximize holiday revenue while they focus on providing high-quality, pain-free customer service to legitimate holiday shoppers.

By working with the right fraud-prevention solution provider to identify, track and flag fraudulent behavior automatically, merchants can dramatically reduce the impact of deceptive purchases on their business. There are a number of tools to fight fraud, so every merchant should thoroughly evaluate these technologies to ensure the most comprehensive and flexible solution is deployed to mitigate risks while simplifying work for their internal fraud department.

The Internet has become an instrumental channel for targeting consumers during the season of gift-buying frenzy. In order for retailers to fully take advantage of the benefits of reaching customers online, grow their bottom lines and enhance the consumer experience, they need to be aware of the increased threats they face and implement comprehensive risk management strategies to substantially minimize their vulnerabilities.

Jeff Liesendahl is the President of Accertify, an American Express Company. Accertify is a leader in providing e-commerce companies with hosted software solutions, tools and strategies for preventing online fraud and mitigating enterprise-wide risks.